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The Problem with Paying Later: Illinois' Budget Deficit

The state of Illinois' finances are in dire straits with a $9 billion deficit that continues to grow. Richard Dye, of University of Illinois' Fiscal Futures Project, co-authored and released a study yesterday called Apocalypse Now? The Consequences of Pay-Later Budgeting in Illinois. He discusses how we got into this hole and how we can find our way out. Read the full report. And check back here later to view graphics on the state budget.

Richard DyeRead an interview with Dye about the report.

You say that the deficit could balloon to $14 billion by 2024 if no policy changes are made. In your observation, does it seem that politicians are practicing or pushing for enough reform?

No. There are certainly some people who have been aware of this, that get it, but each year it’s about getting through the year, not about solving these underlying structural problems. Behaviorally, politicians in the state have not gotten it. There are a few exceptions, but it’s hard to be optimistic.

Another drain on the state’s pocket is the decline in tax revenue – the state’s largest source of revenue. The income tax rate was 5 percent from 2011-2014 until it dropped to 3.75 percent for a scheduled phase-out on Jan. 1. Outgoing Gov. Pat Quinn argued the state couldn’t afford this drop in the last elections while newly elected Gov. Bruce Rauner supported it, albeit with little explanation as to how to recoup the decline in returns. Do you think Rauner has a plan? Will he go back on his campaign promises and re-raise the income tax rate?

I expect he does. He’s been getting some good advice. He’s had budget books written for him by some people I’ve worked with. If he has a plan, it will need to square up with the political structure in Springfield. Balancing the budget is one thing, but getting a majority of the vote for it and the people in Illinois to understand it is another thing. I don’t think that he will return to a higher tax rate if he can avoid it.

It seems like Rauner’s focus is on generating jobs and economic activity instead of generating revenue from taxes. Is that a fair assessment?

It’s a nice and easy thing to say on the campaign trail. And we do want to get the economy moving, but we don’t know how to do that. The evidence is very mixed regarding how and whether incentive programs, like tax cuts to businesses, can get the economy moving. We do know that it won’t raise a lot of revenue in comparison to our deficit, but it sounds good on the campaign trail. We didn’t hear tough talk during the elections, which is understandable, but here we are with this problem.

What kind of detrimental effect will this lower income tax rate have?

The effect is that the budget becomes more unbalanced than it already was. Within the range of accounting shifts and time, the problem is that no planning has been done to figure out what we’ll do without this revenue. There have been three major surges of temporary revenue: the income and sales tax collections in 2007 and 2008, which were a bubble. People were spending way more than their incomes could support. The second are the stimulus funds we received. And finally, the 2011-2014 tax increase. All of these should’ve been seen as temporary and unsustainable, but they were seen as reasons to continue spending as usual.

How important are new jobs and increased economic activity to the budget?

It’s a tough trap, because the moment that our fiscal problems accumulate, the fewer choices that we have in the future. More of our future budget will be devoted to paying back our prior obligations. We’re losing wiggle room. We also want a vibrant economy, but we have to settle these debts first.

Can you go into possible solutions? The state will obviously have to cut spending. Where can we expect to see those cuts?

If no action is taken to choose where the priorities are, it’ll be social services. Education is very hard to cut but it’s a big part of what the state spends. It’s hard to tell. My guess is that the immediate thing to happen is that we’ll have an across-the-board freeze on all spending. That’s the wrong idea for the long-term. You don’t want to cut things that are more important than others, but we may have to do that. We may have to cut all that we can instead of basing cuts off of priority.

What areas are off limits?

Pensions and debt service are off limits.

How feasible is a spending freeze at 2015 fiscal year levels? How long would it take for our revenue to match up with our spending?

I think when Rauner’s transition people were going around talking to state agencies, they were saying, “prepare yourselves for 10 to 20 percent cuts mid-year,” because there is trouble getting through this year with the decreased income tax.

If you make allowance for several major categories of spending and revenues that are linked, like Medicaid, and if we froze everything across the board in 2015 dollars, the budget would be balanced in 2022. This is a fixed dollar freeze. A purchasing power freeze allows spending to go at the rate of price inflation, which won’t balance the budget until 2034.

Illinois’ pension problem is no secret. If Quinn’s 2013 pension reform law, which pushed back the retirement age and did away with cost-of-living adjustments, isn’t upheld by the Illinois State Supreme Court, any progress could be halted. Do you think Quinn’s law will be upheld? How bad will the forecast be if it isn’t?

I do not think Quinn’s law will be upheld. I think that the Supreme Court pretty much telegraphed what it would say in a decision they made about cutting retiree health care. They said, “you can’t do this, these people have a contract.” Contracts tend to signify unconstitutional rulings.

Are there alternatives to Quinn’s law if it’s overturned?

Not a lot is indicated. There may be things around the edges that could be done, but that’s tens of millions, not the tens of billions that we owe. Rauner has asked that the Supreme Court, if they rule to overturn Quinn’s law, that they give some indication as to what they wouldn’t overturn.

You say that the problem has gotten so bad that it’s affecting every single person in Illinois. Can you tell us how each resident will feel this burden?

Because of what has been done with these past deficits, more and more money will be devoted to paying back previous IOUs. People in Illinois are going to receive less government services. What we view as a government duty will have to be reconsidered. People will have to revise their expectations about what the state can do and they’ll have to pay more. People will pay more and get less from the government, as unpleasant as that is.

Your report outlines how legacy costs, or the state’s obligation to pay previous debts, will crowd out much of the state’s spending. How detrimental are these obligations to the state’s budget?

I didn’t do an across-the-board look at other states, but in terms of bond ratings and bond analysts, Illinois has the worst bond ratings of any state. Our fiscal problems are recognized in the lending community to be the worst of any state, particularly because they haven’t been addressed.